A federal court has ruled that Walmart can be sued as a ‘joint employer’ of nearly two thousand temporary warehouse workers at a major Walmart distribution facility in Southern California. The catch: the workers load imported goods like toys and electronics exclusively for Walmart. But they are not employed directly by the giant retailer, nor do they receive a paycheck from the company.

With this ruling, the class-action lawsuit, Carrillo v. Schneider, becomes a milestone in the effort of workers’ advocates to push legal and financial liability for poor wages and working conditions up the retail supply chain, to the marquee retailer at the top—in this case, Walmart.

“It’s the first joint-employer class-action that I’m aware of involving any company in that industry,” said Catherine Fisk, Chancellor’s Professor of Law at UC Irvine and an expert on employment law. “And certainly with Walmart, it involves the most high-profile retailer.”

“What it says is that since Walmart has such tremendous control over its supply chain, which is its key to its business model, Walmart has effective control over the workers unloading boxes in its warehouses,” says Fisk. “And it should be responsible for the rampant safety and wage and workplace violations in that workplace.”

The Case: Carrillo v. Schneider

The Carrillo case was brought in October 2011 on behalf of 1,800 low-skilled workers employed by temporary staffing agencies at a warehouse complex in Mira Loma, California, east of Los Angeles. The warehouse (Walmart distribution center #6060) is operated by Wisconsin-based Schneider Logistics. It is one of a series of massive warehouses nationwide that are part of Walmart’s proprietary distribution chain, though it does not own or operate them.

Workers at the Mira Loma facility have described widespread labor abuses dating back to the early 2000s. “They wouldn’t pay us overtime, so we would work sometimes from 6 a.m. in the morning to 9 p.m. or 10 p.m. at night,” says warehouse worker David Acosta, who is covered by the class-action lawsuit. “And we also had this fear that if we complained, we would often see the repercussions where our paychecks would be short during the pay period. We would sometimes notice that we would get $40 to $50 less. Most of the workers, their [immigration] status was questionable. But sometimes the supervisors would actually help falsify some of the documents.”

The California Department of Labor has investigated these and other allegations. In late 2011—prior to the lawsuit being filed—it fined the temporary employment agencies hired by Schneider Logistics more than $1 million for wage theft, retaliatory termination, and other serious violations.

Walmart and its contracted logistics companies in Southern California, Illinois and other national transportation hubs, have been battling a union-backed campaign to organize its temporary warehouse workers. The groups Warehouse Workers United (in Southern California) and Warehouse Workers for Justice (in Northern Illinois), have also been pressing state agencies to pursue workplace inspections and investigations. The groups met with Walmart executives last fall at the company’s headquarters in Bentonville, Arkansas, but so far do not report any progress in addressing their grievances.

Walmart as Joint Employer

Until late last year, Walmart had kept itself at arm’s length from the Carrillo case. But Judge Christina Snyder of the U.S. District Court for the Central District of California has now ruled that Walmart can be added as a defendant alongside the warehouse operator and temporary staffing agencies.

Lawyers for the plaintiffs will now have the opportunity to prove in court that Walmart exercised effective control over the warehouse, its temporary workers, and operations, and will also have the opportunity to claim that Walmart should be liable for damages that could reach into the tens of millions of dollars, says plaintiffs’ lead attorney Michael Rubin of the firm Altshuler and Berzon in San Francisco.

“One hundred percent of the goods loaded and unloaded in these warehouses are destined for Walmart distribution centers,” says Rubin. “Schneider works for Walmart. We are trying to establish as a matter of economic reality—which is the short-hand test that the courts apply—that the companies higher up in the chain bear legal responsibility, because they have the right to control what goes on on the workplace floor, and because in many instances they exercise that control.”

Rubin says there’s already strong evidence that this is true, even prior to full discovery in the case. “We do know at this point that the key managers and supervisors employed by Schneider had Walmart emails as well as Schneider emails,” says Rubin. “And we’re trying to trace what role Walmart actually played in determining how much money is available to pay the workers, what the productivity levels would have to be, what sort of quotas would be imposed and so forth.”

Rubin continued: "This ruling is significant because it establishes that a company can't avoid owing a duty of care to its workers by using layers of contractors as a buffer between itself and those who do its work."

Walmart issued the following statement in response to the judge's ruling in the case: “Today’s action merely echoes the judge’s preliminary ruling last month so, while we disagree, today’s ruling wasn’t unexpected. So far, there have been no findings of fact as to the claims made in the case nor if Walmart would be responsible for any part of those claims, if proven true. We continue to believe that Schneider Logistics and its contractors are independently responsible for managing their people and that the facts will demonstrate that Walmart is not a joint employer of the plaintiffs. That said, it is important to note that we hold all of our service providers to high standards and it is our expectation that the law is always followed.”

A spokesperson for Schneider Logistics referred Markeplace to Walmart for further comment.

In her ruling, Judge Snyder laid out what allegations Walmart will need to defend itself against in the next phase of the trial. Walmart will now need to counter the plaintiffs' claim that its warehousing contracts (with Schneider) are structured so frugally, that subcontractors are likely to violate labor and employment laws in order to deliver their service at the low cost Walmart demands.

Agriculture, garment industry, now retail

Law professor Catherine Fisk says the case could set a significant precedent, if Walmart is indeed held liable for labor conditions of temporary workers in its contracted U.S. warehouses.

“Whoever is ultimately selling the product is in the position of forcing cost reductions down the supply chain, and they’re able to do it because they set up a bidding war among suppliers, who in turn set up a bidding war with the companies that supply labor, and the winner supplies the lowest-cost labor,” Fisk explains.

“Walmart has taken this to a whole new level of sophistication and effectiveness, to the point where every year Walmart demands that its suppliers produce goods for less money than they did the year before. It’s how they keep prices so low, by constant pressure on their suppliers. The theory of this case is that if warehouse workers in California’s Inland Empire are being paid piece-rate that works out to lower than minimum wage, for instance, Walmart’s contracting practices are forcing their contractors to do that, so Walmart should be responsible as a joint employer for those safety, wages and working conditions.”

Similar joint-employer theories have been used effectively in the past to press liability onto large corporations at the top of the supply chain in other industries where labor-subcontracting is rampant. These include the garment industry and agriculture, and more recently, janitorial services for commercial buildings. Fisk says this case pushes the strategy into the massive and lucrative U.S. retail industry for the first time.

About the author

Mitchell Hartman is the senior reporter for Marketplace’s Entrepreneurship Desk and also covers employment.